Sanity check on actively-managed fund

[GardenerB]

Hello all.

Looking to check my assumptions and get some feedback on a trust for a friend, since I told him that what he has (or who his 'Wealth Advisors' are) is no better than passive indexed with lower fees.  This is for a Canadian fund but common questions to U.S.

From the yearly reports he showed me, the details I could see were:

• Fund is actively-managed with the typical main stocks, bonds, etc (like the big banks, energy, corporate bonds, gov't bonds etc.)
• Fund is very conservative to preserve capital (50% bonds and certificates, 50% equities)
• The 'benchmark' for performance comparison is listed as 48% FTSE TMX Universe fixed income, 15% MSCI EAFE (world equities), 15% S&P500 (US equities), 20% TSX (Canadian equities), 2% treasury bills.
• Advisor is taking 1% yearly fee.
• Fund has beaten the index over 8 years by 1.3% (has returned 8% averaged over last 8 years while benchmark noted was 6.7%)
• Fund pays out approximately 4%, of which manager pays self 1%, leaving 3% to beneficiary (guess this adds up to 4% or typical SWR to preserve capital)

So, my assumptions/questions are:

• Since the fee is 1%, then this actively-managed fund only really beat the index by 0.3% (8% - 6.7% - 1% fee), correct?
• Unless I am missing other factors, there should be indexed funds out there that can replicate the benchmark holdings, and for fees around 0.1 to 0.3%) That is, some mix of corp bond funds, short-term bonds, small cap/midcap, US, world, Canada equities etc.
• If he could find indexed funds above for 0.3% fees or less, then he would be doing just as well as the actively-managed approach.
• In addition there would be no 'leakage' of 1% going to an advisor
• Are there any other areas where an active fund manager could be taking fees out of the capital without reporting it?

Of course there is the value placed on whether or not one has no clue or care to manage their own indexed funds.  That is, maybe the 1% is worth it for most people who want nothing to do with investing.  So I am not being pushy but just commenting.

Thoughts and replies appreciated!

GB

[RWD]

A 50/50 US equities/bond portfolio has had an annual return of 8.03% over the last 8 years. Not sure what benchmark you are being quoted. A 100% US equities portfolio has had an annual return of 13.48% over the last eight years.

The performance quote of a given fund should be after fees. So probably 9% before fees, 8% after.

It should be easy to replicate the benchmark with index funds but I'm not sure you necessarily want to. It's typically much simpler to just go with a 2 to 4 fund portfolio. Vanguard index funds typically have expense ratios below 0.1%.

If you don't see shares/money disappearing on your monthly/quarterly statements then it's probably just the expense ratio.

There is no guarantee that this fund will continue to outperform or even match a given benchmark. In the long run active funds always lose because of the higher expenses.
https://www.begintoinvest.com/expense-ratio-calculator/

[GardenerB]

Thanks RWD.

The report shows 8% returns with footnote "Returns expressed gross of fees, net of expenses".  Benchmark is made of

48% FTSE TMX Universe fixed income, 15% MSCI EAFE (world equities), 15% S&P500 (US equities), 20% TSX (Canadian equities), 2% treasury bills

Probably quite close to the iShares funds in your link (for bonds, international equities, and US equities), but with a Canadian equity as well.

Hard to see them taking 1% for basically doing what your sample portfolios would do for <0.2%  People think it is small but if relying on a 4% SWR, they are taking 25% of that, leaving 3% for my friend.

GB